Intel’s weak outlook, spending hikes unnerve Wall Street

Shares of the world’s leading chipmaker slid more than 5% in after-hours trade on Thursday after it projected this year’s capital spending at $13 billion, plus or minus $500 million, exceeding many analysts’ estimates for about $10 billion. Photo: AFP

Shares of the world’s leading chipmaker slid more than 5% in after-hours trade on Thursday after it projected this year’s capital spending at $13 billion, plus or minus $500 million, exceeding many analysts’ estimates for about $10 billion.

Intel said $2 billion of its increased expenditures would go toward expanding a facility for researching future manufacturing technology. Some analysts worried that with PC sales already slow, expanding too quickly may create excess capacity that could hurt the bottom line.

“People are starting to freak out about the capex,” said Sanford C. Bernstein analyst Stacy Rasgon. “The concern is that if I spend a lot of money and I build up my factories, I don’t have enough demand to fill them. They have very high fixed costs, and it pulls your margins down.”

Outgoing chief executive Paul Otellini, who plans to retire in May after a successor is identified, said the investment in manufacturing would lower costs in the long run.

“The leading edge capacity is the lowest cost for us on a per unit basis,” Otellini told analysts on a conference call. “Regardless of what you think the size of the market is, the leading edge fabs are the single greatest asset that we have.”

Otellini said the higher capex is not intended to bankroll a foundry or contract chipmaking business, but he did not rule out manufacturing semiconductors for other chip companies as long as that did not empower a rival.

Intel has agreed to manufacture custom chips on behalf of networking equipment company Cisco Systems Inc., Bloomberg reported on Thursday. An Intel spokesman declined to comment.

In the fourth quarter, Intel’s revenue was $13.5 billion, compared with $13.9 billion a year earlier. Analysts had expected $13.53 billion.

Intel is used to being king of the personal computer market, particularly through its historic Wintel alliance with Microsoft Corp., which has led to breathtakingly high profit margins and an 80% market share.

Intel is expanding its research fab in Hillsboro, Oregon, to develop technology for manufacturing chips on 450 mm silicon wafers, a complicated step up from the current 300 mm wafer standard.

Larger wafers can translate into big savings because more chips can be etched onto each of them. But building 450 mm plants is expected to be so expensive that only a few industry leaders, including Intel, Samsung Electronics and TSMC, are expected to have the necessary scale.

Some Wall Street analysts gave Intel high marks for expected operating efficiency this year.

“The revenue isn’t going to be there, but the margin and expense control is going to stabilize the bottom line,” said Cody Acree, an analyst at Williams Financial. “I think it’s probably a success if you can be flat in an industry that most people expect to be flat to down.”

Intel foresees first-quarter gross margins of 58%, plus or minus two percentage points. Analysts on average expected gross margins of about 56% for the current quarter, according to Thomson Reuters I/B/E/S.

It estimated a 2013 gross margin of 60 percent, plus or minus a few percentage points. Analysts on average had expected 59%.

Net earnings in the December quarter were $2.5 billion, or 48 cents a share, compared with $3.4 billion, or 64 cents a share, year-ago period.

Analysts had expected 45 cents, and said the surprisingly strong performance was partly due to a lower effective tax rate of 23%. This was below Intel’s forecast of about 27%.

Still, shares of Intel fell 5.6% in after-hours trade to $21.43, after closing up 2.58% at $22.68 on the Nasdaq.

“This is a company that is continuing to spend money to participate in the market. That may concern some investors,” said Doug Freedman, an analyst at RBC Capital.